Computer-generated value: Does it help or mislead?

The Housing and Development Board (HDB) last month revised its resale flat policy to require buyers to sign the option to purchase before getting a valuation, effectively consigning the concept of cash-over-valuation (COV) to history.

As expected, there has been some confusion since, as buyers and sellers look for new ways to find the “market price” of resale flats offered for sale. Some industry players quickly sought to provide alternatives to the COV to plug the information gap. They feel that the COV, under whatever new name it may be called, will remain as it fulfils a real market need.

Enter the machine-generated value. There are tools in the market that purport to estimate the value of a property with a high level of accuracy based on the past transacted prices of comparable units.

However, its introduction has been controversial. Because it is computer-generated, valuation purists are up in arms. If a machine can replace a valuer, where is the professionalism? Can you sue a machine for negligence for generating a wrong value? Of course, there are caveats on its use and exclusion clauses, but few pay attention to them.

A recent test of several such tools showed the estimated values generated were close to the actual valuation for some properties, but there were also many that differed by wide margins, said a media report.

Proponents of these machine-generated values maintain that they have a high level of accuracy as the results are close to the figures arrived at by human valuers in the majority of cases.

However, the shortcomings of machine-generated values are obvious. For example, a machine cannot tell whether a particular flat faces a rubbish dump. It cannot tell whether it has an odd-shaped layout nor can it judge the quality of the renovation. It cannot tell whether there is any obstruction of view even if the flat is on a high floor or for that matter, appreciate the views the unit may offer.

Even if most of the estimated values generated by the machine are close to those provided by valuers, the timing of the valuation has now changed.

The valuer now has the benefit of the flat being exposed to the market for a decent length of time and only needs to affirm whether the premium placed on some of the flat’s features are justifiable or unreasonably high.

If most valuations end up close to the actual prices, what added value does the machine-estimated figure provide? Aren’t high COVs the market’s real concern? As properties are not perfect substitutes for each other, the estimated values for some “special” flats without the benefit of a site visit can be off the mark by quite a margin. Are you willing to take that chance?

Machine-estimated values will be most useful and beneficial in cases where the flat concerned is a very popular unit. This is because such units often attracted very high COVs in the past and it would help a potential buyer immensely to know how much cash he or she will need to have.

Yet, if you examine all flats sold with very high COVs in the past, you will notice they all came with unique features that a machine cannot factor into its computation. If machine-generated values cannot help in such situations, where can they contribute? If they are redundant in most cases or misleading in others, we would be better off without consulting such values in the first place.

All right, so estimated values are not useful now, but what happens when the market starts to shoot up again? Then, even a small lag can be significant depending on how fast selling prices are submitted and updated in the HDB database and when the actual valuation is conducted.

My own assessment is that this will not happen. This is because new HDB flat prices have been de-linked from resale ones for some time. This is an important point to note because if new flat prices remain stable, resale ones cannot stray too far before buyers factoring in value-for-money buy directly from the HDB. The de-linking of prices is an in-built automatic stabiliser.

So, if you are a worried buyer or seller, whether now or in the future, let me assure you that the COV will not make a return in whatever form.

By Colin Tan – Director of Research & Consultancy at Suntec Real Estate

Source : Today – 11 Apr 2014

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